ISyE 3104: Introduction to Supply Chain Modeling:
Manufacturing and Warehousing
Instructor : Spyros Reveliotis
Summer 2006
Solutions for Homework #5

ISYE 3104 Summer 2006 Homework 5 Solution
Problem set:
A. Answer the following questions:
1.
Explain what is robust product design and why it is important.
A robust product design is a design such that the product quality is insensitive to small variations in the production or assembly process. Since process variations are inevitable in all types of production, robustness in product design helps ensure product quality. It also increases cost-effectiveness because there will be fewer re-works and scraps.
2.
What is a “House of Quality”, and what is the main information encoded in it?
House of Quality is a graphic yet systematic technique that facilitates (a) the characterization of the relationship between customer desires and the functional features / attributes for a newly developed product (or service), and eventually, (b) the ranking of these attributes, and (c) the selection of a subset of them to be incorporated in the product design. It communicates in a structured manner:
1) what the customer wants
2) how the good/service will satisfy customer wants, i.e., its functional attributes
3) relationships between customer wants and the proposed product attributes
4) relationships, i.e., potential synergies and conflicts , among the suggested attributes
5) importance ratings of customers wants , weights for relationships, and resulting importance ratings for the considered attributes
6) benchmarking of the suggested design(s) through the rating of competing products
It must also be noticed that as a technique for systematic qualitative comparison and ranking and selection of a number of options that are to satisfy a number of posed requirements, the “House of Quality” applies to much more general settings than the particular application context discussed above.
3.
What are the advantages of standardization?
Advantages of standardization:
1) Operation and production planning will be simplified because there are fewer types of components to produce.
2) Instead of producing a variety of components, producing fewer types of standardized components in larger quantities leads to economies of scale.
3) The demand forecast for each standardized component will be more accurate because it uses aggregated forecast data of its parent components. As a result, it reduces the risks of stockout and over-stocking.
4) It lowers the inventory cost because a lower level of safety stock is needed to achieve the same level of protection against stockout.
5) Enables the implementation of the mass-customizing techniques that are applied by contemporary companies in order to satisfy the market requirements for higher product differentiation (see also the answer to Question 5 below).
6) It facilitates better serviceability of the products.
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ISYE 3104 Summer 2006 Homework 5 Solution
7) It facilitates the production outsourcing practiced by many contemporary companies in an effort to reduce their processing costs and focus on their core competencies and value (remember the example of Dell).
4.
Does group technology promote standardization or not? Explain your answer.
Group technology is a procedure that encourages similar components to be produced by the same process in the same work area. Successful implementation promotes standardization by providing a systematic way to review existing component designs to ascertain if an existing component can be used in a new design.
5.
How do companies respond to customer request for more extensive customization while promoting standardization for their products and processes?
To fulfill the request for more extensive customization, companies increase the modularity in the product design, and practice build-to-order or postponement . Increasing modularity means that the end products are built from standard components, while different combinations of standard components give rise to various customized products. At the same time, many companies nowadays practice build-toorder. They offer some specified options (the modules) for customers to customize their products, and the companies produce what the customers order. Alternatively, postponement is the practice to delay any customization to the product as long as possible in the supply chain. Companies postpone the assembly of modules until they get the details of customization requested.
6.
Discuss the importance of flexibility in modern production processes and explain how this concept manifests itself in the operation of contemporary organizations.
In today’s rapidly changing markets, the companies must have the ability to change their product mix and production volumes fast. This ability is founded to a large extent upon the adoption of production technologies that (i) can be reconfigured / switched easily in order to facilitate the production of new items, and also (ii) can be easily expanded to support the production of larger volumes, through the addition of new equipment. The former attribute of these technologies is known as product or scope flexibility , while the latter is known as volume flexibility . A typical example of technology presenting flexibility of scope is the numerically controlled (NC) machine , which can be easily reprogrammed to perform different sets of operations. On the other hand, volume flexibility requires that the adopted technology is modular itself, i.e., it is fairly easy to add production capacity by adding new modules to the existing equipment.
7.
In the break-even analysis presented in class for the “make or buy” problem, there was a single “break-even-point”. Can you contemplate a situation where there might be two break-even-points? Explain clearly your answer, providing all the necessary quantitative analysis.
A typical case is when you get quantity-based discounts by your supplier. A case where the supplier quotes a partial discount scheme under which any quantity up to a volume of q units will be purchased at a price of c
1
, and any excess quantity will be purchased at a
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ISYE 3104 Summer 2006 Homework 5 Solution price c d
, and results into two different break-even points, is depicted in the following figure. (What is the value of the second break-even point?)
A similar example can be constructed for the case of full-quantity discounts, i.e., when the reduced price applies to the entire purchased volume, as long as this volume exceeds a certain threshold, q.
8.
For each situation listed below, recommend the type of layout, among the four discussed in class and listed below, that would be most suitable for an effective operation. Explain briefly the reason for each choice.
Type A Fixed location layout
Type B Product layout otherwise known as flow line
Type C Product family layout otherwise known as cellular or group layout
Type D Process layout otherwise known as functional layout or job shop a) General Electric (GE) dishwasher manufacturing facility. GE is the second largest manufacturer in the U.S. of this type of appliance.
B – Second largest means it has high volume production, and dishwashers use standardized parts. b) A large business center that serves many different customers in a major city, such as a Kinko’s Center, with fast and slow copy machines, graphic arts
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ISYE 3104 Summer 2006 Homework 5 Solution equipment, binding machines for report assembly, computers for word processing, etc.
D –Kinko’s customers usually route themselves through various equipments in the facility, so a process layout is appropriate. c) A large automobile dealer repair/maintenance facility, with services ranging from minor diagnostics and repairs to engine/transmission work to body repair.
D – Their customers can have a high variety of service needs. The volume is regarded as low because a unique process is set up for almost every car and is not repeated in another car. d) An electronics appliance repair shop that handles a wide variety of products, such as televisions, video recorders, stereos, short-wave radios, microwave ovens, burglar alarms, etc.
C – Appliances can be grouped into product families according to their types (one group for televisions, another group for stereos, etc), and there will be designated areas for each product family. e) Manufacturing a luxury cruise boat of a capacity 100,000 tons (this is more than the Titanic weighed).
A – The heavy weight mandates a fixed location for the boat. f) Manufacturing aluminum ladders that range from 12 to 24 ft. long that sell in the range of $200-500 each through large discount stores and through catalog retailers.
B – Ladders are rather standardized with the only variety being the length. Since there is very low variety, a product layout would be appropriate. If there is substantial variety among them with respect to the required processing and the applied material handling, then a group layout might be more appropriate. g) A large sporting/recreational facility that contains tennis, squash, racquetball, diving pool, lap pool, sauna, basketball court, running track, exercise room, weight training room, fitness diagnostic room, locker rooms for men and women, bathrooms, shower rooms, offices.
D – In a sporting/recreational facility, users will route themselves through the facility in the sense that they walk from one area to the next according to their needs. No standardized flow or grouping is necessary. h) A mail service company that prepares mass mailings for customers. Services may include: artwork, printing, printing of items, printing of envelopes, insertion of items into envelopes, sorting of envelopes by postal (zip) code, imprinting of postage meter imprint. Not all customers need all of these services.
C or D – It is a high volume, high variety activity. The high variety requires different processing for different types of mails. On the other hand, the high volume
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ISYE 3104 Summer 2006 Homework 5 Solution might justify the dedication of different cells to different types of mail, i.e., a group layout.
B. Solve the following problems:
1) Let x be a lifespan (in months) that can justify the in-house production. Then,
(20+35)*500x + 500,000 ≤ 80*500x => x

40
2) a) It is not viable because the throughput of station 2 is only 165 units per day. It is not sufficient to support the production of 200 units per day. This effect where in an effort to expand the line capacity by adding capacity to the line bottleneck station, another station becomes the new bottleneck, is known as the “ shifting bottleneck” effect, and the production manager must be aware of it. b) A viable expansion plan is to purchase 1 additional machine for station 2, and 3 additional machines for station 3. c) The cost of outsourcing is $50*150*260 = $1,950,000. d) The cost of the alternative is $30*100*260 + $210,000*2 + $50*50*260 = $1,850,000.
This is lower than completely outsourcing by $100,000.
3) a) Monthly profit without the new equipment = $(1-0.5)*30,000 - $14,000 = $1,000.
Monthly profit with the new equipment = $(1-0.6)*50,000 – ($14,000+$6,000) = $0.
So, it is not profitable for the company to purchase the new equipment. Notice that in the computation of the different variable costs and revenues above, we have considered the corresponding monthly demands. b) Let $x be a unit price that would render profitable the addition of the new equipment.
Then (x-0.6)*50,000 – (14,000+6,000)

1,000 => x

1.02
The company has to sell it at the minimum of $1.02 in order to make the purchase of the new equipment profitable.
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ISYE 3104 Summer 2006 Homework 5 Solution
4) i.
1 batch
$32,500
2 batches
$16,250
P(good market)
= 0.6
Profit = 250(125)-250(50) = $18,750
P(bad market)
= 0.4
$12,500
P(good market)
= 0.6
Price at
125
Price at
80
Profit
= 200(125)-250(50)
= $12,500
Profit
= 250(80)-250(50)
= $7,500
Profit = 500(125)-500(30) = $47,500
$32,500
P(bad market)
= 0.4
$10,000
Price at
125
Price at
80
Profit
= 200(125)-500(30)
= $10,000
Profit
= 300(80)-500(30)
= $9,000
The optimal strategy is to order two batches from the producing company and always price at $125 per unit. ii.
Let p be the probability that the market is good. For ordering two batches to be profitable, p satisfies 18 , 750 p

12 , 500 ( 1
 p )

47 , 500 p

10 , 000 ( 1
 p ) . Solving, we get p
≥ 0.08. iii.
Regardless of the market condition, the artist can sell at least 250 units at a price higher than the cost of $50 each. Therefore, under the stated assumptions, she will surely make a profit if she orders one batch.
5) The accompanying table lists the sequence of machine types required for nine part types produced by a manufacturing facility:
Part type Machine sequence
1 5,3
2 2,5,3
5
6
3
4
6,4
4,6,1
3,5
1,4
7
8
9
1,6
3,5,2
6,1,4
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ISYE 3104 Summer 2006 Homework 5 Solution
(a) Set up a part-machine processing indicator matrix for the data in the table.
M1 M2 M3 M4 M5 M6
1 1 1
2
3
1 1
1
1
1
4 1 1 1
5 1 1
6
7
1
1
1
1
8 1 1 1
9 1 1 1
(b) Determine machine groups and part families using
(i) the Row and Column Masking clustering algorithm presented in class;
M1 M2 M3 M4 M5 M6 M2 M3 M5 M1 M4 M6
1 1 1 1 1 1
2 1 1 1 2 1 1 1
3
4 1
1
1
1
1
5
8 1
1
1
1
1
5 1 1 3 1 1
6 1 1 4 1 1 1
7 1 1 6 1 1
8 1 1 1 7 1 1
9 1 1 1 9 1 1 1
The product families identified are {1, 2, 5, 8} and {3, 4, 6, 7, 9}.
(ii) the Similarity Coefficient approach, with the clustering threshold set to 0.5.
M1 M2 M3 M4 M5 M6
M1 0 0 0.6
0 0.6
M2
M3
0.5
0 0.5
0
0 1 0
M4
M5
M6
0 0.6
0
The machine groups identified are {M2, M3, M5} and {M1, M4, M6}.
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